Lufthansa's M&A appetite curbs quarterly profit growth

BERLIN (Reuters) - Germany’s Lufthansa (LHAG.DE) reported slower than expected profit growth in the first three months of the year, held back by costs of expanding its Eurowings budget carrier amid a wave of consolidation among Europe’s short-haul airlines.

FILE PHOTO: A plane by Lufthansa is seen next to a Lufthansa flag at the international airport in Munich, Germany, January 9, 2018. REUTERS/Michaela Rehle/File Photo

Lufthansa has been at the forefront of a frenzy of M&A activity, snapping up Brussels Airlines and parts of insolvent Air Berlin last year to spread its wings in the competitive budget market.

While the collapse of Air Berlin has driven more passengers to its brands, Lufthansa said on Thursday one-off costs from digesting its former competitor had pushed Eurowings to an adjusted loss of 203 million euros ($247 million) in the three months to the end of March.

Chief Financial Officer Ulrik Svensson said Air Berlin’s insolvency was a “once in a lifetime opportunity to consolidate the German market”, but said upgrading Air Berlin’s fleet had kept some planes in hangars and would lead to further one-off expenses in coming months.

Lufthansa has its eye on further consolidation and has submitted what it called a “concept paper” to Italian authorities setting out its idea for a new Alitalia with fewer planes and staff.

Svensson said the company would only pursue the struggling Italian airline if it were restructured. Italy’s government on Thursday extended the deadline for the Alitalia sale to the end of October.

British Airways-owner IAG (ICAG.L) this month bought a stake in Norwegian Air Shuttle (NWC.OL), sparking speculation that consolidation could extend into the long-haul market.

Norwegian said on Thursday a number of groups had made advances since then, but Lufthansa declined to comment on whether it was among them.

Shares in Lufthansa, which have shed around 16 percent of their value since the start of the year, fell 6.5 percent by 1045 GMT to 23.93 euros compared to a slightly positive European travel index .SXTP.

LOWER CAPACITY

Lufthansa lowered its guidance for total group capacity growth to 8.5 percent from its previous forecast of 9.5 percent due to strikes at Austrian, bad weather and a decision to restrict growth at Eurowings to keep operations stable.

The airline has already seen its growth plans curbed by delays to some short-haul A320neo planes from Airbus (AIR.PA). It now expects to receive six planes this year rather than 12 and is in talks with Airbus about compensation.

The capacity reduction and a weaker U.S. dollar mean Lufthansa now expects a slightly lower fuel bill of 5.8 billion euros this year, instead of 5.9 billion.

The Eurowings costs acted as a drag on Lufthansa’s adjusted earnings before interest and tax (EBIT), which rose only slightly to 26 million euros, far short of the 81.3 million euros forecast by analysts in a Reuters poll.

The Lufthansa brand meanwhile reported its best operating margin in 10 years in the quarter, while freight arm Lufthansa Cargo almost doubled its profit, thanks to robust world trade.

Unit revenues are expected to rise slightly in the second quarter, Lufthansa said. For 2018 as a whole, it still sees them remaining stable from last year.

Major European rivals IAG, Air France-KLM, Ryanair and easyJet are all due to report results in May.